From niche market to mainstream

Since September 2002, Framlington has changed its focus from providing specialist niche sector funds to more mainstream UK equity areas. The poaching of George Luckraft and Nigel Thomas from ABN Amro precipitated the shift and the changes have certainly helped grow Framlington’s business. It now has £4.3bn assets under management, with about 75% of this being retail money.

The performance of its fund range is also strong. Over the past three years, 13 out of 22 funds have posted first or second-quartile performance, according to Standard & Poor’s. One-year performance is better, with half of its 24 funds in the top quartile of their respective sectors. The group’s unit trust range includes a number of specialist funds including biotechnology, healthcare, technology and financial portfolios. Most of its assets under management are invested in equity portfolios, held predominantly in British companies.

Luckraft, who runs the group’s Equity Income fund, and Thomas, manager of the UK Select Opportunities fund, have both posted impressive performance figures since joining the company. The poorer performance has generally come from Framlington’s niche sector funds. Nick Hodgson, group sales and marketing director, says: “For probably the first time in our history, these key hires have enabled us to have a credible and attractive product in core UK equity markets.”

Sam Liddle, fund of funds manager at Miton Investments, says: “Framlington has done a great job of turning itself around. Thomas and Luckraft have made a big difference.”

The company employs about 140 staff who work on the same floor in one office, says Hodgson: “This enables crisp decisions, as lines of communication are short and we avoid as much bureaucracy as possible. We are a boutique-style investment house.” Framlington generally has a bottom-up stockpicking style, based on a “growth at a reasonable price” philosophy, he says: “A lot of latitude is given to managers in portfolio construction. We have experienced managers and allow them to follow their own ideas. We have a lot of refugees from larger companies who like working in a boutique environment where they can get on with running money.”

Framlington’s investment style is conducive to strong performance in current market conditions, says Hodgson: “Benign inflation, reasonable economic growth and gently rising interest rates contribute to an ideal environment for stockpickers.” He explains that turnover of stocks varies by manager: “The most ruthless seller of an idea when it goes wrong is Thomas. He will cut out a position aggressively. Richard Peirson’s Managed Balanced fund has a much lower turnover. It is a more cautious, ‘steady-Eddie’ vehicle.”

The £162m UK Smaller Companies fund is the strongest-performing fund over three years, returning 94%. Managed by Roger Whiteoak, the portfolio is geared to growth and is top of its sector over one year. The fund currently holds about 110 stocks, says Hodgson: “Whiteoak is a conviction manager, but the portfolio is not a 30-stock high-octane small-cap punting fund.”

Investors in the Biotech fund have not fared so well. Formerly managed by Antony Milford and now run by Gareth Powell, the fund is Framlington’s worst-performing portfolio. It has lost 26% over the past three years. Hodgson argues: “The problem with the Health and Biotech funds is they are in the dumping ground [Specialist] sector. There are a lot of oddball funds there with different mandates. The Biotech portfolio is a high-octane specialist sector fund. Our style always runs the risk of being both top and bottom-quartile.”

Ben Yearsley, investment manager at Hargreaves Lansdown, says: “Framlington has a few decent managers. Luckraft and Thomas are their star managers and Whiteoak has performed well. Framlington has a good performance record and we currently have six of its funds on our Wealth 150 list.

“It has a decent range of funds, although they tend to be specialist sector or higher-risk funds. The higher-risk style is not necessarily what we are looking for. As we see it, Framlington is more about the individual managers rather than the company as a whole.”

Hodgson agrees: “The reality is that intermediaries and investors look at the record of fund managers rather than the company. We have star fund managers, but there is an emphasis on teamwork.”

Patrick Armstrong, multi-manager director at Insight, says: “We invest £12m in the Equity Income fund. Luckraft’s style of combining growth together with income in the small and mid-cap arena appeals to us. He has a talent for unlocking performance from these type of companies. Our portfolios tend to have a higher weighting in larger companies, so we don’t invest in many of their funds that are currently biased towards small and mid-cap stocks.”

Hodgson says some managers have a greater slant to smaller-cap stocks than their peers: “We set out our stall as a multi-cap manager with flexibility. We are not a slave to smaller companies and don’t have specific mid-cap funds like other asset houses.”

Recent changes among senior staff include Jeremy Lodwick joining the group as chief investment officer last November and Peter Chambers’ resignation as chief executive officer in March. Hodgson says: “It was a big surprise and came out of the blue. Peter had some personal issues with the board and decided to leave, but our strategy stays intact. The company grew strongly in the 18 months he was chief executive.” Chairman Lord Douro is acting chief executive.

For the 12 months before Lodwick’s appointment, the company did not have a chief investment officer, explains Hodgson: “Some would argue that a boutique company does not need a CIO, but we believe that provided they run money, which Jeremy will eventually be doing, it is necessary. We have some talented young fund managers who need support and guidance, and CIOs need to organise and stimulate debate among managers.”

Former chief economist Jonathan Asante also left the group to join First State’s global emerging markets team last year. Additionally, David Mitchinson, manager of its Japan fund, left last July to join JP Morgan Fleming Asset Management; he was replaced by Baillie Gifford’s Anja Balfour.

>From a distribution perspective, the retail business is split two ways. Top-end intermediaries, including private client stockbrokers and fund of funds managers, provide most sales. Historically, the group has aimed its product range and focused most of its resources on this distribution channel, says Hodgson. However, the group is planning to increase its sales in the “general practitioner” intermediary market: “Intermediaries are looking for more managed generalist solutions. They don’t all have the time or expertise to deal in direct funds. This is one of the reasons that multi-manager funds have taken off.”

Although Framlington is not a multi-manager product provider, it has links with life companies with open architecture structures, such as Skandia and Winterthur. Peirson’s Balanced Managed fund has changed to a retail charging structure this year to attract investment from intermediaries: “We need to spread our wings and recognise that there is not enough visibility in some areas,” says Hodgson. “We are complementing our distribution channels and diverting more resources into the general practitioner intermediary market.”

Hodgson explains that certain UK funds have a small and mid-cap bias, and there is a need to monitor fund sizes as excessive growth can impact on effective management and hinder performance: “We have already hit capacity on the Equity Income fund, which was soft-closed in February. The £785m fund is at a level where we don’t want to be swamped by new business. We are growing business sensibly rather than grabbing money for the sake of it.”

The portfolios attracting most new money are the Select Opportunities and Smaller Companies funds, says Hodgson: “We have seen big chunks of money coming in from fund of funds managers.”

Miton’s Liddle says: “We invest in the Equity Income and Select Opportunities funds, and are happy with what we are getting. Framlington is well perceived in the marketplace and has a pragmatic approach to managing money.”

There are four main areas of focus for the group, says Hodgson. Developing broader distribution in the UK retail space is at the top of his list, aimed mainly at the “general practitioner” intermediary market through its Managed Balanced fund. He adds that the performance of its non-UK funds is also important: “The performance of Mark Hargraves’ European fund is steadily improving.”

Hodgson also wants to develop the company’s hedge fund business. Framlington currently has one long/short fund, the Absolute Return UK fund, managed by Luckraft, which was launched in December: “Early signs are good and there are plans for more launches.”

Finally, Hodgson wants the group to run another investment trust alongside its existing mandates: “We are watching the market carefully and are interested in pitching for investment trust mandates. We have had conversations with various groups.” Investment trust boards are behaving in a more independent way, he explains: “I think more mandates will be up for grabs.”

Indeed, Framlington appears to have spread its wings over the past few years. But to ensure success, it needs to remain focused on producing consistently strong performance in its core areas of business. Perhaps it has diverted attention to areas that may not attract the level of investment to which it has become accustomed, or perhaps, as in 2002, its change of tack may result in success.

Group was established in 1969 and currently manages assets of £4.3bn for investment trusts, pension funds, charities, institutions, unit trusts and Pep and Isa investors. Its unit trust range comprises 24 funds and includes specialist healthcare, biotechnology, financials and technology portfolios. Framlington is jointly owned by HSBC Holdings (51%) and Munder Capital Management (49%) and employs about 140 people.